The Relativity of Disruption: E-Banking as a Sustaining Innovation in the Banking Industry

Article excerpt


Clayton Christensen's Disruptive Innovation Theory (DIT) is one of the most renowned frameworks in strategic management. One important question discussed in the context of this theory is whether the Internet and also the business models of pure e-banks constitute a disruptive innovation to the retail banking industry. The objective of this paper is to address this question by conceptually analyzing the case of Nordea Bank (Scandinavia), an incumbent that has over the last decade enjoyed extraordinary success in e-banking. The paper first demonstrates how the Internet has been a sustaining innovation at Nordea and then concludes that pure e-banks are unlikely to create a disruptive innovation in the retail banking industry.

Keywords: Disruptive innovation, sustaining innovation, technology-based innovation, E-banking, Strategy

1. Introduction

Clayton Christensen's Disruptive Innovation Theory (DIT) is one of the most influential theories in the recent academic and management literature. This is reflected not only in his bestselling books "The Innovator's Dilemma" and "The Innovator's Solution", but also in the discussion and follow-up work that his theory created among academics and managers alike.

Christensen suggests a broad definition of the concept of innovation. To him, innovation refers to all changes of "processes by which an organization transforms labor, capital, materials and information into products or services of greater value" [Christensen 1997/2002]. Thus, in addition to creating new processes and products, innovation also includes new types of business models.

The DIT recognizes two types of innovation: on the one hand, sustaining innovations generate growth by offering a better performance in existing markets. Usually, regardless of whether they are incremental or radical, these innovations are exploited successfully by the established players in an industry and do not lead to revolutionary changes in an industry's landscape.

On the other hand, compared to existing products and business models, disruptive innovations initially have a lower performance in the traditionally most important performance criterion (such as functionality, speed, or size). Even though, in most cases, disruptive innovations are less complex from a technological viewpoint, they are usually brought to the markets successfully by new entrants. Christensen posits that this is due to the behaviour that incumbents and new entrants typically display. Managers in incumbent firms are unwilling to support disruptive innovations because: (1) they usually do not fulfil the needs of the firm's existing and most profitable customers and (2) they offer a much lower profit margin than sustaining innovations do.

As Christensen points out throughout his publications, it is not always easy to apply the categories of disruptive and sustaining innovation in practice: "Even people who deeply understood the theories [of disruptive innovation] struggled to use them in a repeatable and methodical fashion" [Christensen et al. 2004]. One reason for these difficulties is the fact that "disruption is a relative term" [Christensen and Raynor 2003]. This means that even though a particular innovation is disruptive to one player in an industry it might be sustaining to another. This implies that firms have to be careful when categorizing innovations, particularly if most companies and the public opinion consider an innovation to be of disruptive nature. For example, throughout the second half of the 1990s, the Internet was believed to be a disruptive innovation to almost all industries while in reality, it turned out to be of sustaining nature in many industries. There, the Internet had a sustaining impact in that it strengthened the position of the established market leaders.

Particularly, in the area of electronic retail banking there has been an ongoing dispute among academics regarding the disruptive nature of the new business models based on the Internet. …


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